Lanyon Partners Market Update: Our take on the recent volatility in the market

Published: November 23, 2018

Author: Aaron Hall

Many investors have noticed a spike in volatility in markets through recent weeks. The month of October, for example, saw the US Market (S&P 500 Index) fall 9% for the month, while our index (the ASX 200) fell 6%, raising concerns amongst investors regarding the outlook for their portfolios and whether another Global Financial Crisis (GFC) is within reaching distance.

Following the sustained growth of the US share market, which has proven to be contagious as global markets have followed suit there is growing sentiment that we may be approaching a peak in the market. This causes investors to act irrationally and straying away from the strategies they have initially put in place.

We would like to highlight the long-term approach to your investment strategies that we have agreed upon for your portfolios, and how history has shown that making reactionary decisions is often more detrimental than abiding by the initial guidelines that were put in place at the beginning.

The October Effect

The recent sell-off was sparked due to a multitude of reasons;

The US central banks are attempting to normalise monetary policy by increasing the interest rates,

Brexit and the uncertainty in Europe

The ongoing trade wars between the US and China,

Inflation and wage growth concerns, and;

The pressures on companies to deliver profits going forward.

Amalgamating these concerns, and the psychological impact that the ‘October effect’ has on markets, caused investors to panic.

The October effect is a theory that markets tend to decline during the month of October which was conceived from the fact that some of the largest historical declines in markets occurred during the month of October. For example, the Panic of 1907, Black Tuesday (1929), Black Thursday (1929), Black Monday (1929), and Black Monday (1987) all occurred during the month of October in their respective years. We therefore believe that the recent tumultuous markets are part of normal market cycles and is why we reiterate our preference to retain a long-term approach to the investment market.

Investment ‘Experts’

We are all prone to the belief that we can time the market better than anyone else, despite research showing that market timing has been historically unsuccessful. The problem is that timing the market can work both in your favour, or against, highlighting the element of luck with such a strategy. Many experts repeatedly called the peak of the market throughout 2017, and for those who believed that the timing was right may have forgone significant profits as the market continued to rally into 2018. As we also saw during the GFC, many investors attempted to call the bottom, and could not see a way for their portfolios to eroded any further. Surely enough, the markets found a way. However, there is a quick and easy way that can prevent you from unnecessarily forgoing gains or eroding your wealth! And the trick is to stick to the long-term strategy that was put in place when you first entered the market.

The Reality

To provide a sense of the impact that the recent market fluctuations have had, we provide two charts of the S&P 500 Index which provide a comparison between the severity of the volatility depending on different investment timeframes. For example, the first chart (sourced from Yahoo Finance) provides a 6-Month overview of the index, which shows that the recent downturn has eliminated the gains made over this time period.

However, when retaining our long-term investment outlook (at least 5-years), the recent volatility is nothing more than a blip on the radar, and would slip the majority of minds when looking back at this time period.

Importantly, such market fluctuations are natural, and have occurred throughout history as can be noted in the second chart (sourced from Yahoo Finance). While it is common to grow concerned when volatility spikes, those who stray from their strategy may forgo potential gains as would have been the case for those who exited the market at the beginning of 2016 when Chinese markets fell and infected the rest of the global markets, whereas those who held on with white knuckles reaped the rewards over the following 3-years.

Conclusion

To mitigate the element of luck, and to allow the diligent research and work we put into formulating the construction of our portfolios come to fruition, a long-term outlook is required. However, should you still have concerns about your portfolio going forward, please do not hesitate to contact your financial adviser to discuss your risk appetite for the future.

The information contained herein is of a general nature only and is not intended to be relied upon nor is it a substitute for appropriate professional advice. Whilst all care has been taken in the preparation of the material, it is not guaranteed to be accurate. Individual circumstances are different and as such, require specific examination. Lanyon Partners cannot accept liability for any loss or damage of any kind arising out of the use of or reliance upon all or any part of this material. Additional information may be made available upon request.